How We Rebuild with Jesse Powell of Kraken Exchange

In order to rebuild we must first learn or relearn (for some of us) the painful lessons of crypto’s past. It’s going to take more than beating the, “not your keys, not your crypto” drum. Jesse Powell, Co-Founder of Kraken Exchange joins us to demonstrate how we can come together as a community to rebuild the open and inspiring crypto industry of our dreams. ------ 📣 Infura | Join the New Decentralized Infrastructure Network Early Access Program www.bankless.cc/infura http://www.bankless.cc/infura ------ 🚀 SUBSCRIBE TO NEWSLETTER: https://newsletter.banklesshq.com/?utm_source=banklessshowsyt 🎙️ SUBSCRIBE TO PODCAST: http://podcast.banklesshq.com/ ------ BANKLESS SPONSOR TOOLS: ⚖️ ARBITRUM | SCALING ETHEREUM https://bankless.cc/Arbitrum 👯 DESO | DECENTRALIZED SOCIAL BLOCKCHAIN https://bankless.cc/Deso 🦁 BRAVE | THE BROWSER NATIVE WALLET https://bankless.cc/Brave 📡 TRUEFI | CRYPTO FINANCIAL HUB https://bankless.cc/TrueFi 👾 SEQUENCE | ALL-IN-ONE PLATFORM https://bankless.cc/Sequence ⚡️FUEL | THE MODULAR EXECUTION LAYER https://bankless.cc/fuel ----- Topics Covered 0:00 Intro 4:38 Jesse’s Crypto Background 7:34 Relearning Painful Lessons 11:48 How Did We Get Here? 20:09 Things We Have Control Over 31:21 Striking the Right Balance 36:35 Proof of Reserves 43:55 Rebuilding 48:39 Zooming Out 50:35 Closing & Disclaimers ------ Resources: Jesse Powell https://twitter.com/jespow Proof of Reserves https://www.kraken.com/proof-of-reserves ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://www.bankless.com/disclosures

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Ryan Sean Adams?

  Welcome to Bankless, where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, how to front run the opportunity. This is Ryan John Adams. I'm here with David Hoffman, and we're here to help you become more bankless. Bankless is on the mind today, certainly in the events of FTX, the total collapse of FTS X. We wanted to get the thoughts of an exchange operator, Kraken. Jesse Powell is on the podcast today. He's been a long time crypto OG and exchange operator, co-founded Kraken back in 2013, 2014, sometime in that timeframe. And he gives his raw, unfiltered thoughts on what happened with FTX, why it happened, the red

• 0:45Ryan Sean Adams?

  flags we should look for in the future, and some wisdom and insight. And he also gives some advice in terms of how we can move forward. It's really refreshing, David, for me to hear from Jesse at this point in time. He's seen it all, including the Mt. Gox days, and he reflects on what this means for the future of crypto.

• 1:03David Hoffman?

  And he also gives a pretty good lesson about proof of reserves. And Kraken is, of course, the exchange that I think implemented proof of reserves first, and importantly, voluntarily, not after FTX imploded, but before. And so I think Jesse and Kraken deserve applause for that fact. And I kind of consider them leaders before we actually needed them. And so if you were curious about proof of reserves and how it actually looks like on the Kraken side of things, and the limitations and abilities that proof of reserves give to centralized operators, then you will also get that lesson in the show.

• 1:41Ryan Sean Adams?

  Guys, this is a blitz episode, so it's a quick interview format with Jesse Powell. We've been doing more of these in the aftermath of the event that just happened. We hope you enjoy it. We'll be right back with our conversation with Jesse. But before we do, we want to thank the sponsors that made this episode possible.

• 1:57David Hoffman?

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• 3:26David Hoffman?

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• 4:09David Hoffman?

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• 4:38Ryan Sean Adams?

  Bankless Nation, we're super excited to introduce you to Jesse Powell, co-founder of Kraken, never been on Bankless before, but what better time than now? Last week was the collapse of one of the largest exchanges in crypto. But Jesse Powell, he runs Kraken, which did not collapse last week. Jesse, welcome to Bankless. How are you doing?

• 4:57Speaker 02

  Hey, doing well, thanks. Thanks for having me. I'm doing great, actually, relatively speaking.

• 5:03Speaker 02

  Been around for a long time, so we've seen a few of these before, unfortunately, but hanging in there.

• 5:07Ryan Sean Adams?

  How long have you been here? You've been here since the Mt. Gox days, Jesse. Were you around then?

• 5:12Speaker 02

  Yeah, that's actually how I got into the business of running an exchange. Back in 2011, Mt. Gox got hacked for the first time back in like June of 2011. I had been doing some Bitcoin mining and just like playing around with crypto.

• 5:28Ryan Sean Adams?

  Oh my God, you said for the first time. I think some people aren't aware of that, right? Like, it wasn't just once Mt. Gox got hacked. There were multiple times.

• 5:36Speaker 02

  There were multiple times, yeah. And the final implosion in 2014 was actually the result of an earlier hack, maybe even the hack in 2011 where some private keys were compromised and that was not noticed. And over the course of years, that wallet was drained as it continued to be topped up with new client deposits. And eventually, that came to be realized. And it was a 600,000 Bitcoin hole at the time. So yeah, Mt. Gox was hacked at least twice. But so anyway, yeah, 2011, June 2011, they got hacked.

• 6:19Speaker 02

  I went out to their office in Tokyo to help them out for about a week and a half and came away from that whole situation thinking that the industry needed another exchange, probably needed many. It was totally, it was really terrible for the whole industry back then. I mean, there wasn't really trading happening in other places. There was some OTC trading happening. But Gox is maybe like 95% of all trading that was happening in Bitcoin at the time. And them being offline for a week meant that we had no price discovery. You know, merchants couldn't take it and there were still a few merchants selling stuff for Bitcoin. You know, like alpaca socks and like other things like that. You know, back in the day, some collector's items now that you could get for Bitcoin.

• 7:02Speaker 02

  So it just kind of shut the whole ecosystem down. And, you know, I came away from the experience thinking that, you know, for us, if we're going to get to mainstream adoption, we've got to develop a really professional financial service that is like first and foremost, super secure because obviously Bitcoins are like the best thing you could possibly steal. And there's going to continue to be these attacks on exchanges. So that was kind of like the whole impetus for like starting Kraken was that, you know, I thought that my co-founder and I could actually make a good run of that.

• 7:34David Hoffman?

  I think the parallels here are pretty obvious. There's definitely some differences where Mt. Gox was like a technical error where this was a fraud. But I think really the lasting impacts are probably the same. You know, the, some of the parallels that I'm seeing is that people post Mt. Gox. Even people like, I remember Andreas Antonopoulos talking a lot about this, like we, they thought crypto thought Bitcoin thought at the time like, oh, this was over. That was a fun experiment. We're dead. It's dead now. It wasn't dead and no one really thinks that FTX, this FTX event is really going to kill crypto. But even the crypto, like people like me and Ryan are just like demoralized as to like, how far this is going to set us back in our conversations with regulators.

• 8:19David Hoffman?

  Like the rest of the world kind of is thinking, wow, is this going to be what kills crypto? And it just kind of goes to show me, Jesse, I want your opinion on this is like, damn, we kind of forgot about the whole not your keys, not your crypto thing. But that's like the lesson that we learned out of Gox. And so maybe this is also going to be the lesson that we relearn with FTX about, hey, it's self custody is important. It's a shame that we have to learn this way. We have to learn through pain. But I'm wondering like, is that what you kind of see as like the inevitable fallout of FTX is like, it's just the new age Gox for the 2022 year?

• 8:58Speaker 02

  Yeah, I wonder if we have to keep going through this pain every few years when there's kind of a new cycle of people that come in that have forgotten the last big hack and end up trusting someone they shouldn't have trusted. But there are people that I know that lost a ton of money in FTX that lived through Gox and they had just admittedly become so trusting of FTX because of everything around them that was happening. I mean, it's almost like, this is like a combination of Madoff and what's like the blood testing company? Theranos. Yeah, it's basically like Theranos, right?

• 9:40Speaker 02

  They stack their board, they put all these people around them that are super trustworthy, they end up buying all this favor, the media completely has their back, irrationally so. Investors are just throwing money at them blindly and I think all these people just got to think, wow, everyone else just totally trusts these guys, my funds must be completely safe there. It's just unfathomable that these guys would go down. I mean, they must be making jillions of dollars because they're just giving so much money away. Never occurred to people that maybe they're giving away my money. Maybe they have so much money to give away because they're actually stealing their clients' funds. For some reason, people were worried about the hack, I think because of Gox.

• 10:23Speaker 02

  They didn't consider this scenario where it's just explicit theft and a real legit Ponzi intentionally. So I think a lot of people were caught off guard by it because of all of the hype and I think it is going to set us back tremendously. We've been working very hard in DC over the last eight years or whatever to undo the damage of Gox. Gox is still not resolved, by the way. People still haven't gotten their money out of it. I hope, some of that has to do with the particulars of the case, it being in Japan, there being frivolous lawsuits coming after it. But I hope things will go quicker here in the States with FTX.

• 11:08Speaker 02

  But this could be a very drawn out process. People could still be feeling the pain from this many years from now and we're going to have to continue to explain to regulators. Why this is a Bernie Madoff situation? Why is this a Theranos situation? This is not an indictment of the stock market or stocks or the medical profession or anything like that. This is like a specific individual, a specific company. They could have scammed people with anything. They just happened to scam the crypto community. And we should not punish the crypto community or blockchain technology or the innovations because of one bad actor who was running a centralized Ponzi scheme.

• 11:48Ryan Sean Adams?

  Jesse, I want to get your thoughts on how we got here? How you think we got here? And the reason that's an important question is because it's more of the context. If we go back to the Gox times and we fast forward to today, I think there was a massive difference in perception among mainstream, let's call it. That, yeah, the Gox wild days, where you've got this magic, the gathering, exchange, and people don't know what they're doing. It's barely secure. And it just seemed like a joke of a custody solution back then. There was like no security. It was like paper walls around the thing. And now today, you have FTX.

• 12:27Ryan Sean Adams?

  And it's serious people in suits going in front of Washington DC in Congress, having celebrities endorse them, having large investors invest in their massive raises, run by a, I don't know, was he on the title of the cover of Forbes? Was it Forbes or Fortune? This wonderkind who has come out of, like, not the OG generation of crypto, but somebody's really come at it from a different angle, different lens, come here to kind of professionalize the industry. And there was just this trust. And part of that trust was crypto has now grown up. It's now professional.

• 13:12Ryan Sean Adams?

  It's not going to lose your funds like in the Gox days. And so FTX is the exchange that everyone should trust. How did we get there? How is that perception so out of touch with reality?

• 13:26Speaker 02

  You know, I think establishing that persona in building this perception was just part of the scam all along, you know, it to have this, you know, I was always suspect of it like this guy is just like, he's just too clean, like, you know, he's just like, everything he does is like altruistic and like, you know, he's donating all this money to charities and all this stuff and, and but what he was saying was didn't, didn't line up with me, you know, like he's calling for regulation against DeFi and at the same time, you know, seeking to make that trade, like, I'll give you DeFi if you give me the approval to like, you know, run this thing in the United States, uh, you know,

• 14:10Speaker 02

  which is not a trade he had the authority to make or anyone, you know, I think nobody blessed him in that. And obviously there's been a massive pushback in the industry. So how did he get so far out, uh, you know, admittedly, his strategy had been extremely effective, right? I mean, he gained a lot of awareness, a lot of traction. Obviously, he was telling DC what they wanted to hear, you know, this was like music to their ears. Oh, this company, this guy here, he wants to be regulated. He's, he's, you know, he was literally right under their noses, running the biggest Ponzi, just like Bernie Madoff was, you know, the SEC had even gone to Bernie Madoff's office and investigated them and found nothing. Uh, meanwhile, you know, it was right there the whole time. So, you

• 14:53Speaker 02

  know, it seems like if you donate enough money to the right people, uh, if you align yourself with the right ideology, um, you get politicians, you get the media, you get these people to have your back, um, despite what your actual interests are. And, um, you know, I think from, from the industry's perspective, you know, he said from the beginning that, uh, he was here to make money. He wasn't interested in crypto, uh, that he was just kind of profit motivated the whole time. And you know, to me, again, that's like another huge red flag. You know, I mean, most of us, I think, are here for crypto. You know, crypto is is the end goal. It's not just like a means to make more money in the short term while we

• 15:38Speaker 02

  and then use that money to donate it to some other cause, right? Like crypto is the thing we're all here to bring to humanity because we feel like this is going to do for humanity what you know, information sharing did for humanity with the internet. So, you know, for someone to come in and say like crypto is not my goal, but I have some other goal, which is just to like basically extract as much money as I can out of crypto and then use that for whatever else, like, you know, donating to politicians or, you know, whatever. You know, I always had red flags there. It just seemed like, you know, a person with a persona that was like kind of too good to be real. So I think that, you know, it hurts. It hurts that someone has been in DC, you know,

• 16:22Speaker 02

  basically trying to attack the industry behind closed doors, wasn't working with the industry, didn't have the industry's best interests at heart. Yet, at the same time, the industry was just like giving them tons of business. So like, why would that be? And, you know, I think it's because they were offering products and services that that people really wanted, but that the the more established players were just not able to offer because of the level of scrutiny that they had come to accumulate over years of successful operation. You know, so like us, Coinbase, you know, Gemini, the US exchanges that have been around for a long time are under heavy scrutiny. You know, even saw Coinbase, they asked the SEC for permission to offer

• 17:06Speaker 02

  like a was it three or 4% like yield product? Yeah. You know, and they got shut down like before they could even start it. Meanwhile, FTX is offering a same product with like 10% plus yields offshore. There's, there's nothing really preventing US residents from going to use that service. You know, they're doing shoddy KYC, they're doing like, they're not actually like, you know, checking your VPN or whatever, like, you know, they basically make it so if you want to do it, you can. And so.

• 17:36Speaker 02

  People were going there, you know, it's like too easy to do it. And so, you know, I think this is a failing of the regulator and that they prevented a good domestic business from doing this, therefore forcing the consumer to go offshore for what they want, at the same time failing to enforce against that offshore operator. And so, you know, it's a very screwed up situation. We need dramatic reform, I think, to the laws because I think we can't count on the regulator to actually enforce things fairly. And you know, there's certain things that you just can't do in the United States. They'll just tell you, that's illegal here. And no, there's not a license for it. So, you know, in their view, it's just basically like murder. Like, oh, you're asking for a license for murder? No, we don't, there's no license for murder.

• 18:21Speaker 02

  So, you know, you're gonna have to go offshore if you want to murder people. So, you know, and that's basically, you know, what they say. And we'll say, look, like, you know, people obviously want this product. They're going offshore to get it right now. You're not stopping those guys. So like, you either have to like, let us do it and we're happy to be supervised, or like go shut down our competitors. Because right now, you know, you're basically, you've created this situation where you're attacking domestic business, these good actors, just because, out of convenience, because they're in your backyard. And, you know, that's literally, they will say that. They'll say, hey, like, you're telling us to stop doing this, but like, these other 20 companies offshore are doing it. So what are you gonna do about it? And they'll say, well, yeah, those guys are all, yeah, they're kind of hard to get

• 19:05Speaker 02

  because, you know, they're in China or they're in, you know, the Bahamas or whatever. It's like, it's just harder to enforce over there. You guys are right here, how convenient. So, you know, we're gonna put some notches on our belt by going after the easy targets. And I think just as a country, we need to decide what our national strategy is gonna be. On cryptocurrency, you know, and I think it's, I think it's a hugely important thing. You know, I think the US largely owns and controls the internet. And I think that's, that's played out extremely favorably. You know, we own most of the largest tech companies. And I think it could be similar for, for crypto. But right now it's set up in a way that you're really strongly incentivized to go offshore.

• 19:48Speaker 02

  And there seem to be like no consequences for it. And, um, you know, at the mean, and the domestic businesses continue to suffer under this, uh, this authoritarian regime that, you know, both refuses to enforce against offshore competitors and, and also refuses to help in any way. So I don't know, I've been rambling for a while. I don't even know if I answered the original question.

• 20:10David Hoffman?

  This is great. No, I'm, I've been loving this. Uh, and I, I think this conversation about this whole drama is really divided into two categories. It's like the external parties that we can be mad about SPF being the guy that we should all be furious at. And he is the con artist, but at some point like, uh, at this point, I'm kind of convinced that Sam's just a sociopath. So what's the point of being mad at Sam? Like, he doesn't care. Uh, he stole customer funds in the first place. Um, and then also like Gary Gensler and like the SEC and regulators, like I can, maybe we can be mad at them. And they are supposed to listen to us. Uh, and I'm happy to go down that, that like, that conversation and like unpack like in all the ways that the SEC and the CFTC

• 20:53David Hoffman?

  has failed to produce a more friendly environment for safer products onshore. And, but those are like the external things. So those are the, like, we should be mad at them. Uh, and, and that's a talking point that we should hammer into the regulators' eardrums for the next year until, until they give us what we want as an industry. But Jesse, I'd also like to open up the conversation to like things that we have control over. Uh, cause like this is our industry and when there's a rug pull. Doesn't matter if it was a sociopath or not, it's still our industry. And there are some things that I think we can have responsibility over. And in your recent tweet thread, you talked about the number of red flags that were identifiable. And I think post 2022, as this year wraps up to a close,

• 21:38David Hoffman?

  we can see all the red flags that are kind of obvious in hindsight that are ones like that SBF had here that you've, that you put in this tweet, and I'll read it out for the, for the listeners. You list a number of red flags. Acting like you know everything after you show up to the battle eight years late. Nine figures of buying political favor. Being over eager to please DC. Huge ego purchases, like a nine-figure sports deal. Being a media darling, seeking out puff pieces. Virtue signaling and, and FTT, of course. These are the big red flags. And some of these red flags, I think, also are shared by the other criminals of 2022, if you will.

• 22:19David Hoffman?

  Really, the, the huge ego is really the thing that stands out to me the most. And I'm wondering if you can just like, these are, these are things as an industry, we all need to learn. These are the flags. And Do Kwon has his own favor of flags. Three O's Capital had their own flavor of flags. But I'm wondering, like, when you think about like, all right, what do we as an industry have control over? What can we do better? How can we be more prepared next time? What are your thoughts on, on that whole side of the conversation?

• 22:50Speaker 02

  Yeah, I think it's easy to kind of get trapped in the thinking of like, you just look at one thing in isolation. And you're like, that's kind of suspicious, but meh, like, there's so much other positive stuff. You really have to kind of like assemble all of these pieces together and, and look at it as a whole. And like, you know, with like, these 10 things that are really sketchy, like, as a whole, can I ignore all this? Or, you know, is this all just like, you know, coincidental or something? And I think that was like, kind of the case with like FTX and some of these other things too, right? Like you just, people see like one thing and like, meh, like, you know, well, like Do Kwon's a genius. Or, oh, you know, Sam's a genius or whatever. Like they have all these other backers and, you know, I think a lot comes back to this, like, the social proof that these guys were able to get because there's so much money involved.

• 23:35Speaker 02

  And because early insiders were able to make so much money and, and they lent their, their reputations to these things. I think it just allowed a lot more retail to pile in. So, I mean, one thing to look at is just like, Of the people who have their name on this thing, like, how much are they up already? You know, did they get some kind of preferential treatment? Like, were their names just bought? Or are they in this because, you know, they're really, like, they paid a fair price and they're really in it for the tech? But most of these, anything with a token, like, if you see, like, a big-name VC on it, like, 90% chance they bought the token at some, like, 90% discount to the ICO price. So, all of these red flags, you know, I think are there.

• 24:17Speaker 02

  You know, I think some people, myself included, you know, I could have called out Sam Moore. I think, you know, Galwa Capital called out Luna. Three Arrows actually called out Sam, you know. I think, I think that, you know, it's, it's tough to take, I think, another exchange CEO's, you know, criticisms, like, seriously, because people will just dismiss it as being like, oh, like, you're just trying to, like, kill your competitor, you know? And, you know, also, like, there's, there's, like, the possibility of, like, you know, defamation suit as well, right? You're like, I mean, I haven't seen FTX's books. And for all we know, they might have been totally clean until, like, six months ago.

• 25:02Speaker 02

  You know, when maybe he just got, like, nailed with some cascade of, like, you know, big hits with, like, Luna and Celsius and all this other stuff, you know? So, it's kind of hard to know, you know? Like, someone might be running a legit operation and then just, like, blow up.

• 25:20Speaker 02

  You know, in FTX's case, you know, another red flag that I didn't have on that list there was, you know, when we were hearing from investors, so we were talking, like, the same investors at the same time. And these investors were comparing us to FTX. And they would ask us, you know, like, hey, it looks like you guys have, you know, like, your security team is like 100 people. But it looks like FTX is doing so much more than you, and their whole team is like 50 people. So, you know, they would look at this, and, and, you know, this is, like, extremely naive. And I think these guys are mostly used to investing in, like, Instagrams and stuff like that, not like, not companies. Yeah, definitely not Fort Knox, you know? And you're, and you're like, yeah, okay, you know?

• 26:01Speaker 02

  And obviously, like, emerging in, like, 2019, and then catching, basically, the entirety of the bull market?

• 26:09Speaker 02

  You know, their growth, if you look at their chart, it just looks like a crazy hockey stick because they just came in right on the floor and just like everything exploded and they were there at the right time. They were small enough to skate by the regulators and do all this crazy stuff and capture all this growth. But, you know, I used this phrase before, like, they basically built a glass cannon, you know, it's like you're familiar with like, video game builds, you know, like, basically, it's like, all points in like, attack and like, zero points in defense. And, so yeah, you can go fast when you're like, you know, 50 guys in a room together, just doing whatever, like, pushing product out with like, no security review, no audits, no process, no controls, all of this stuff

• 26:53Speaker 02

  that you might want, you know, from a custodian, you know, and if you, I think most people were thinking of them as a trading venue, but to trade there, you have to custody your funds there, you know, so really, I mean, first and foremost, you should be thinking about like, okay, I'm gonna put my funds here to trade, maybe they have all these really great trading features, but I have this counterparty risk when I do that. I have my funds there, and am I gonna make enough trading to make up for losing all my money, you know, when this thing blows up? And, you know, as we've seen, that there was like, very little, very little process, right? Like, I mean, I don't have control at Kraken to, to move money around, no one has the ability to move money around like,

• 27:37Speaker 02

  secretly, you know, everything requires like, multiple signers, there's just audits happening all the time, there's systems like reconciling things all the time, you know, this, this, but this would have been possible, you know, 10 years ago. And, you know, that is like, what I told these VCs was like, look, these guys are, are early-stage startup, they're obviously just kind of like, doing things like, they're cowboys, basically, you know, I mean, they're, they're like, they're getting away with this now, but I think it's just a matter of time before this catches up with them. And, Unfortunately, the VCs were just like, I think they didn't appreciate the risk. And they saw a hockey stick and they saw an opportunity.

• 28:22Speaker 02

  And I think as an industry, what we can do is we have to just like look for these signs and not try to like, you know, ignore the profits and ignore the great user experience and just think about like what we have exposed and what is our risk profile. And even people that should have known better, you know, didn't spot this.

• 28:42David Hoffman?

  Sequence is the all-in-one developer platform you need to build Web3 games and applications. For your users, Sequence is a smart wallet and it's the easiest, most intuitive onboarding your users will ever experience and comes with all the features users need to feel empowered in the Web3 world. Multi-chain support, NFT display, and users can buy SFTs, NFTs, and crypto directly with a credit or debit card. For developers, Sequence is the plug-and-play platform for Web3 games and apps. Their APIs let you bring NFTs, SFTs, and tokens into your game or application. And a Sequence relayer enables gasless transactions for your users. Sequence already powers some of the best Web3 games like Skyweaver, NFT projects like Coolcats, and marketplaces like NiftySwap.

• 29:24David Hoffman?

  And Sequence is compatible with all the EVM chains, including Ethereum, Polygon, Binance Smart Chain, Arbitrum, Optimism, and Avalanche. So go to sequence.xyz/banklist to start building or speak with the Sequence team today. If you've been listening to Banklist, you know that we're fans of the modular blockchain thesis. The idea that blockchains will separate execution from data availability and consensus, allowing all three to become the best versions of themselves. And Fuel has built the fastest modular execution layer in the industry. By supporting parallel transaction execution, Fuel unlocks significantly faster throughput for the Web3 world. Fuel also goes beyond the limitations of the EVM with its own Fuel VM, which is more efficient and optimized, opening up the design space for developers.

• 30:06David Hoffman?

  And lastly, Fuel brings a powerful developer experience with its own domain-specific language, Sway, and a supportive tool chain called Fork. With Fuel, you can have the benefits of smart contract languages like Solidity while adopting the improvements made by the Rust tooling ecosystem, letting the Fuel development environment go beyond the limitations of the EVM. If you want to learn more, there's a link in the show notes to see how you can get involved with a Fuel network. TrueFi is DeFi's largest credit protocol, connecting global lenders with institutional-grade lending opportunities. TrueFi has completed over $1.7 billion in originations and paid out nearly $35 million to lenders, proving that DeFi is ready to take its next big leap into the $8 trillion credit market. TrueFi gives lenders like you access to sustainable, high-yield opportunities

• 30:50David Hoffman?

  backed by real-world investments, usually reserved for high-net-worth individuals. At the same time, fund managers use TrueFi's financial infrastructure to bring their portfolios on-chain, benefiting from the global liquidity, cost savings, and transparency of DeFi. TrueFi is a decentralized financial utility. The protocol is owned and governed by the TrueFi DAO, and TrueFi is here to bring DeFi into the golden age, bridging the power and access of crypto with institutional-grade lending opportunities and portfolio tooling. Explore the diverse financial opportunities available on TrueFi or launch your own portfolio at truefi.io.

• 31:21Ryan Sean Adams?

  Jesse, how do we balance this? So if we identify the signs, okay, and you go on your next tweet and you say, "As an industry, we have to recognize the signs, believe people when they tell us who they are and they show us who they are, and then shame them and shut them out. If we don't, they'll take us down with them when they inevitably destroy themselves." And what I think crypto struggles with, the social layer, back to David's internal problems versus external problems. The internal problems, the social layer. Sometimes we swing the pendulum too far in one direction and then we swing it back too far in the other direction, right? So I wouldn't be surprised, maybe we're seeing the early stages of this, Jesse,

• 32:04Ryan Sean Adams?

  where we see kind of like a witch hunt kind of thing going on, right? Where now there's this, I think, a ton of it's healthy, for sure. Get your money out of exchanges, like don't trust Verify, like proof of reserves, all of these things. Yes, yes, yes, reform, reform, reform. But then also, sometimes in our crypto tribalism, we can take these things too far. And we can be like, "Well, no other asset but Bitcoin. On-chain Bitcoin, that's it." Right? And like, we can almost develop our own flavors of extremism and maximalism that close our minds to other things that this industry can create. So all your time in crypto, you've seen it all, man. Like, how do we strike the right balance coming out of this

• 32:49Ryan Sean Adams?

  so we don't rock too far from one extreme to the other and we actually achieve what we need to achieve in the social layer here?

• 32:58Speaker 02

  Yeah, I think it's important to remember that everyone in this industry, whether you're a Bitcoin maximalist, or you know, a DeFi Dgen, you, we're all kind of in this boat together. And the regulators don't really draw a distinction between any of us. No, I think they may draw some distinction due to ESG FUD around like, you know, proof of stake versus proof of work. I think we, we need to correct that. And I'm glad that there's more information coming out about actually, you know, how Bitcoin benefits the, the energy grid and all this other stuff. But, you know, I think, I think at this kind of time, we have to be on the same team. And it's really us versus the regulators,

• 33:41Speaker 02

  versus the legislature, versus the politicians right now, because there's going to be some response. We haven't felt it yet. And, you know, politicians are going to come out, they're always looking to make a name for themselves. They're always looking for any reason to attack Bitcoin or DeFi. And, you know, even if you're a Bitcoin maximalist, a bill that, that gets proposed that seems to only affect, you know, let's say like proof of stake systems or something like that, you know, that kind of thing is just like a foot in the door. And it's only a matter of time, you know, before they, they come after Bitcoin, or they come after whatever your favorite token is. And so I think as an industry, we have to try to protect as much ground as, as we can together as a

• 34:21Speaker 02

  whole, and work together on this. It's really, at the end of the day, us versus the incumbent powers, the governments, you know, who are going to try to take this freedom facilitating technology away from us. And so we can't be doing all this like infighting with each other at a time like this. You know, I think it's really time, time for the whole industry, all coins, to rally together. I mean, including the scam coins. Please take your scammed money and like contribute it to, you know, good crypto causes. That would be an effectively altruistic thing to do with the money that you scam.

• 35:04Speaker 02

  It's, you know, it's, I totally get your point about like, you know, over, overreacting to this. And, um, you know, we certainly want there to be innovation and we want new projects to be able to come out and do things, um, you know, and for me, it's just like, uh, take a risk-based approach to things, you know, like, uh, I would never tell anyone to like, put all their money in Kraken. I would say like, you know, if you're going to trade, um, you know, maybe don't trade it all in one place, you know, not that I would vouch for any other venue, but like, you know, certainly I always say, don't leave all your money on Kraken because you just never know. I just can't promise that we will never be hacked or that we'll never have all of our money confiscated by the government or, you know, whatever. So,

• 35:46Speaker 02

  um, people should just diversify where they have their money. I think it's a great thing about having several exchanges is that you don't have to like, just trust everything in one place, you know, please only keep on exchanges what you really need to trade with and to the extent you can trust yourself with self custody, um, you know, take it off to your own cold wallet. Um, you know, if you don't trust yourself, like that's fine. Maybe do a little bit of research and maybe think about splitting it up a little bit, um, instead of trusting it all at one venue. Um, you know, honestly, I, there probably will be overreactions and it'll probably mean that, um, you know, there's some fighting and some, some good projects, you know, don't get the kind of attention that they deserve.

• 36:29Speaker 02

  Uh, you know, I guess it might be inevitable.

• 36:35David Hoffman?

  I'd like to hear about like the internal conversations at Kraken and hear if like this whole FTX debacle has changed and made any decisions, uh, be like, have any, have any decisions been made as a result of this? And I do believe that actually Kraken as a result, or not as a result, uh, Kraken was one of the first exchanges to actually implement proof of reserves. So maybe Jesse, you could, you could talk about that and uh, maybe if there's any other exchange founder listening to this episode right now, you could, uh, give them some advice as to how to implement proof of reserves.

• 37:06Speaker 02

  Yeah. Um, the way we, we did it. So we started, we did this first in 2014. I think we were the first exchange to ever do it, uh, which is not only a proof of

• 37:18Speaker 02

  Assets, you know, so I think what we have called proof of reserves is this system, basically, which is collectively proof of client liabilities together with proof of assets. And so that allows users to see, you know, what we, what our total holdings are in crypto of the covered assets and what our total client liabilities are. And it allows clients to verify this, that their balance was included in the audit cryptographically. So, you know, conceivably, all of the clients could come together and share their, their hashes and everything and, and build the same Merkel tree and, you know, confirm that everyone was included. Really? In the report.

• 38:03Speaker 02

  So, you know, I think that's an important distinction from, from what we've seen some people do just in the last few days, which is just kind of publish a list of their wallets. You know, that just gives us kind of one, one side of it. And it's great to see where their wallets are. You know, I think that'll be useful in the future if we ever see huge amounts of money moving around like suspiciously, you know, it could be something to keep an eye on. But what we really want to know is do you have enough money to cover everyone's deposits? And so we did it twice last year. We intend to do it at least twice next year. We want to increase the pace of this because I think that the more frequently you do this, the less likely it is that you're able to sort of scam the process somehow.

• 38:46Speaker 02

  You know, I mean, the criticism is always that, but you could have just borrowed all those, those coins that you used in the audit, you know, which, which is a legit criticism. But, you know, the more often you do it, and if you, if you can do it on a regular cadence or, you know, even an unpredictable cadence would, would be better, right? Like if you could just say like, it's up to the auditor, it's up to some, some random thing on, on the blockchain, when we're going to do it. And, and then you'd be able to kind of see. In theory, if there's funds moving around, you know, around that time, you know, you might be able to catch something like, oh, why did Kraken get, you know, all these huge deposits right before? Why were all these withdrawals right after the audit?

• 39:27Speaker 02

  So, you know, doing it more frequently is definitely key. Just a one-off thing, you know, is not as valuable, but still better than nothing. I mean, at least would show that someone was able to get that money from somebody, you know? I mean, like, FTX wouldn't be able to do this now, right? Because they're not going to find someone to lend them billions of dollars to perform this audit. So, you know, if you're, if you're deep underwater, like in the Mt. Gox scenario, no way they were going to get anyone to lend them 600,000 Bitcoins to do an audit. So, you know, if you're only slightly fractional, maybe you can get away with it with some loans. If you're hugely fractional, which is really what we're trying to avoid mostly, is these massive, multi-billion dollar blowups. This would, the proof of reserves,

• 40:12Speaker 02

  combined with the proof of liabilities, would definitely identify something like that much, much earlier, or make it, make it almost impossible, almost impossible to hide. And Jesse, just to clarify, regulators don't require this. This is something you guys are doing voluntarily. Yeah, that's right. Yeah, we just did it voluntarily, as sort of, you know, trying to be industry leaders and trying to, to encourage others to follow us. You know, I hope that more clients come to demand this kind of thing from their exchanges. I think there's not enough education around this right now, which is something that we're working on. So, you know, it's not something that people just like naturally think about. Like, when you go to sign up for a bank account, you're not thinking like, oh, is Bank of America solvent? Like, you know, should I, should I check their audits versus Wells Fargo? Yeah, I think people

• 40:57Speaker 02

  just come in automatically trusting, I think, assuming that like, the regulator has somehow like, looked at this and is like, supervising this or something. But that's clearly not the case. And so, I think we got to educate people on that. And I think part of that comes down to like, these, the rankings websites, you know, they have, I think, a lot of influence into who goes to which venues. And, you know, historically, they've been ranking off of just kind of self-reported, like fake inflated volume numbers, which FTX heavily gamed as well. And you know, I think that that proof of reserves combined with proof of liabilities. And you know, some other kind of like basic business fundamentals need to be included in these rankings that are posted.

• 41:42Speaker 02

  Uh, I guess I think that's a huge way to to just, you know, kind of more passively drive users to the right venues.

• 41:49David Hoffman?

  Well, Jesse, the the voluntary adoption of proof of reserves and also a few other things that you've said so far in this podcast about how you don't even suggest to users that you only use Kraken and you use competitors exchanges as well. It's very emblematic and true to the nature of the ethos of crypto. And it's like frustrating that because you are who you are, uh, you actually open up the door for somebody who has a big fat ego to like come in and get their foot in the door in the crypto industry and uh, taint the the values of crypto in order to to produce something like like FTX, which makes me frustrated because on one hand, we have Kraken who voluntarily implemented a constraint upon its own business

• 42:33David Hoffman?

  in the nature of in in the good faith of the nature of crypto. Uh, and then on the other hand, you have something like FTX. So I commend you for taking on the proof of reserves challenge before it was even made obvious to all of us here in the crypto industry, why we need it. Uh, and so, well, thank you for doing that. And I I plan on on promoting that that aspect about Kraken because it deserves to be promoted. And I wish I had done that a little bit sooner.

• 43:02Ryan Sean Adams?

  Honestly, I really want to know at this point, like what other exchanges have a system like this like it's um, I should know this as a crypto user off the top of my head. And the fact that I don't, uh, nor the depth that the exchanges are doing for proof of reserves is probably part of the problem.

• 43:19Speaker 02

  Yeah, there are a few others that that have done this same process, um, smaller exchanges.

• 43:26Speaker 02

  And you know, I think I hope that the media also doesn't give too much credit to the people who've promised to do it before it's actually done, because I've already seen some of that. And I'm just thinking like, this is exactly how we got into this mess with FTX is like giving too much credit on on baseless promises before people have actually performed. And I hope that the other exchanges come around and do it, but um, You know, I'm not so

• 43:48Ryan Sean Adams?

  Light a fire under them, my friend. We will help. I mean, I think this is something we want to push in the aftermath here. Jesse, thanks for joining us. I know this has been, you know, quite a crazy time in crypto, but we need some of the OGs to give us some leadership and talk about the way forward. Maybe this is sort of the last question we have for you today is, let's talk about rebuilding. How long will it take to rebuild? What do we do? Where do we go from here?

• 44:17Speaker 02

  Well, the good thing about the ecosystem now, and this wasn't the case back in 2014 with Gox, that, you know, we're much more developed now. We have DEXs, we have many other exchanges that have gone through several bear markets that seem to be reliable over time. You know, that have at least proven they can survive sort of, you know, a liquidation crunch or a liquidity crunch. So there seem to be more options now. So I think we're not in as bad of shape. You know, I think when Gox went down, there was a lot of pain. And I think when, for FTX to go down, the other exchanges can keep on running, you know? Like, we've got enough, plenty of other exchanges for the volumes to flow.

• 45:01Speaker 02

  No one is going to get crushed by, you know, some new onslaught of user activity. So I think we're in pretty good shape in terms of like, where are people going to go trade and like, you know, what alternatives they have.

• 45:14Speaker 02

  It's going to take some time, I think, to recover from kind of like the political damage that has been done here.

• 45:21Speaker 02

  You know, I think obviously there's maybe $10 billion of client funds that are still trapped in FTX. I mean, obviously that's a massive hit, right? Like those, the money's maybe just gone. Hopefully people will get something back. But, you know, I mean, it's obviously going to take that value out of the ecosystem, which might have been used to invest in, in new projects, in other good companies. It's just a massive hit to lose $10 billion of capital, you know, from this industry, to have that just stolen away that could have gone to great stuff and moving this industry forward. So that's going to take some time to recover from. Obviously, the prices are depressed, you know, as a result of all this as well.

• 46:04Speaker 02

  So I think we're going into even, an even deeper Bear market winter, you know, and it might be protracted. We don't have another Bitcoin halving until, you know, like March 23, I think. So, um, or is it 24? But, you know, it's going to be some time. And, you know, I think that's sort of like the next, uh, the next kind of big event that, that might cause us to kind of like bounce out of, um, a bear market. So I think unfortunately, you know, it's, it's the same, it's the same story as it kind of has been for the industry for the last 11 years that I've been in it, which is like, you know, we got to keep marching up this hill. Maybe we got to sprint up the hill for a little while, uh, to, to recover some ground.

• 46:49Speaker 02

  But this is a war and it's a marathon. And, you know, I don't think we're ever going to be able to rest on our laurels as, as an industry. I think they're going to continue to be bad actors coming in that we have to get out. They continue to be blows against the reputation of the industry and misleading information out there.

• 47:06Speaker 02

  But, uh, you know, ultimately, I think, you know, we, we got to remember why crypto is here in the first place. And that is to, uh, you know, deliver, um, Bitcoin and, you know, financial freedom, basically to, to the whole world right now. And there are billions of unbanked people out there right now who have no access to financial services. I think it's sometimes easy to forget that, living in the States, you know, where you're delivered like 40 credit cards on your 18th birthday, like unasked. You know, where we just like, you're tripping over like financial services being thrown at you all the time here. You know, I think we've got to remember like what we're all really doing this for, because it's going to be a tough battle. I mean, you even see attacks on, on the internet still.

• 47:50Speaker 02

  You know, you have countries that have fired, firewalled off and, you know, have total government control over the internet. So, you know, even if we feel like we've, we've hit escape velocity with crypto, which I don't think we have yet. You know, I think governments are still coming for it. And I don't think it's big enough yet to, to totally, um, not make almost worthless in most of the world.

• 48:11Speaker 02

  We've got to, uh, we just, we just got to keep pushing through because the attacks are just never going to end, you know, and I think, I think people need to stop thinking about this, like, we're going to win or sometime, at some point, and then we're just going to like coast, you know, I think it's just like, the attacks are going to keep coming forever, unfortunately, and we're going to keep having to fight forever for our right to financial freedom and financial privacy and the separation of money and state.

• 48:38Ryan Sean Adams?

  Separation of money and state, these are some of the values that, that are fundamental to crypto. And maybe the final question, because you just brought this up in my mind, zoom out for us, you've been here for 10 years, did you ever think we'd get this far?

• 48:51Speaker 02

  Uh, yeah, I thought we'd all be in flying saucers, you know, trading Bitcoin across planets by now. Well, we can thank SBF for the fact that we're not, so. Yeah, maybe Elon will put Dogecoin in Twitter, and that'll, that'll be the breakthrough moment. Yeah, I thought, I thought, you know, when I first got into Bitcoin, I was like, this is, this is obvious, you know, like, I knew all these kids were using World of Warcraft gold to like, as real money, basically, to trade for things, and, you know, World of Warcraft was sort of like, their banks, they would go to, go to school, they would not have, even be old enough to have a bank account, but, you know, they'd be like, buying things from other kids with money on their World of Warcraft accounts. And, um, you know, so I knew there

• 49:31Speaker 02

  was, there was clearly this, uh, this market, this demand for some kind of alternative, natively digital money. Um, and when I read about Bitcoin, I just thought like, this is like, amazing, you know, this is going to like, completely change the world. Uh, and, you know, we had all kinds of problems with payments and stuff in our, in our last business, which was selling World of Warcraft gold, basically. Uh, so I thought like, you know, I thought everyone would obviously see this, and like, we would all just be, you know, making the move to Bitcoin immediately. Um, so it's taken a lot longer than I expected, but, you know, in hindsight, you know, maybe the adoption curve looks more like cell phones, or something like that, you know, which even, you know, 20 plus years later, many people in the world

• 50:13Speaker 02

  still don't have, you know, smartphones. So, um, you know, it might be something where, where we just never get to like, 100% penetration, you know, and maybe government currencies never fully die off, because there's, they're always, you know, creating some kind of use case for them. Um, so, uh,

• 50:33Speaker 02

  Yeah, I don't know. I like to lost track of the question.

• 50:35Ryan Sean Adams?

  It's funny. It's funny how crypto has kind of grown in ways that are surprising to the OGs in many ways. And yeah, and I think we'll continue. This industry will be continue to be full of surprises as well. Some good and some not so great. But Jesse, we appreciate you giving us your perspective and for spending some time with us on Bankless.

• 50:56Speaker 02

  Thanks for having me.

• 50:58Ryan Sean Adams?

  Bankless Nation, just an action item for you. We will include a link in the show note to Kraken's proof of reserves. You can read more about that and I encourage you to do so and ask your crypto exchange what their proof of reserve policy is. Important for the future risks and disclaimers, of course. None of this has been financial advice. ETH, Bitcoin, DeFi, all of crypto is risky. You could lose what you put in, but we're headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the Bankless journey. Thanks a lot.